Unit 2 Study Guide: Demand and Supply Concepts

Law of Demand

The law of demand states that as the price of a good or service decreases, the quantity demanded increases, and vice versa, assuming all other factors remain constant (ceteris paribus).

Demand Schedule

A table that shows the quantity of a good that consumers are willing to buy at different price levels. It helps visualize the relationship between price and quantity demanded.

Demand Curves

A graphical representation of the demand schedule. It typically slopes downward from left to right, illustrating the inverse relationship between price and quantity demanded.

Demand Elasticity

Measures how much the quantity demanded of a good changes in response to a change in price.

Elastic Demand

A small change in price leads to a large change in quantity demanded (e.g., luxury items).

Inelastic Demand

A change in price has little effect on quantity demanded (e.g., necessities like insulin).

Law of Supply

As the price of a good or service increases, the quantity supplied also increases, and vice versa, assuming all other factors remain constant.

Supply Schedule

A table showing how much of a good or service producers are willing to supply at different price levels.

Supply Curves

A graphical representation of the supply schedule. It typically slopes upward from left to right, illustrating the direct relationship between price and quantity supplied.

Supply Elasticity

Measures how much the quantity supplied of a good changes in response to a change in price.

Elastic Supply

Producers can quickly increase output when price rises (e.g., T-shirts).

Inelastic Supply

Production cannot easily be increased (e.g., oil, custom-made products).

Profits

The financial gain made in a business transaction, calculated as: Profit = Total Revenue - Total Costs.

Total Revenue

The total income a business earns from selling its goods or services

Fixed Costs

Costs that do not change with production levels (e.g., rent, salaries).

Variable Costs

Costs that change based on the level of production (e.g., raw materials, hourly wages).

Surplus

Occurs when quantity supplied exceeds quantity demanded at a given price, often leading to price reductions.

Shortages

Occurs when quantity demanded exceeds quantity supplied at a given price, often leading to price increases.

Equilibrium Points (Price and Quantity)

The point where quantity demanded equals quantity supplied, determining the market price.

Price Floor/Support

A legally established minimum price for a good or service (e.g., minimum wage).

Price Ceiling

A legally established maximum price for a good or service (e.g., rent control).

Perfect Competition

A market structure with many buyers and sellers, identical products, and no barriers to entry (e.g., agriculture).

Monopolistic Competition

A market structure with many sellers offering differentiated products (e.g., clothing brands, restaurants).

Oligopoly

A market structure dominated by a few large firms (e.g., airlines, soft drinks, auto industry).

Monopoly

A market structure with only one seller and no close substitutes (e.g., local utility companies).

Demand

Demand drives production and helps businesses determine prices and supply levels.

Demand schedules and demand curves

They show the relationship between price and quantity demanded, helping businesses and economists predict consumer behavior.

Diminishing marginal utility

As a person consumes more of a good, the additional satisfaction (utility) gained from each extra unit decreases.

Example of diminishing marginal utility

Eating the first slice of pizza is highly enjoyable, but by the fourth or fifth slice, enjoyment decreases.

Change in quantity demanded

A change in price causes movement along the demand curve.

Demand elasticity

Determined by availability of substitutes, necessity vs. luxury, time to adjust, and percentage of income spent on the good.

Elastic Demand

Luxury items like jewelry.

Inelastic Demand

Necessities like medicine.

Supply

It determines how much of a good is available and affects pricing and market stability.

Change in supply

Factors include production costs, technology, government policies (taxes, subsidies), number of sellers, and natural events.

Supply elasticity

The degree to which the quantity supplied responds to a change in price.

Elastic Supply

T-shirts (easy to produce more).

Inelastic Supply

Oil (takes time and resources to increase production).

Fixed Costs

Stay the same (e.g., rent).

Variable Costs

Change with production (e.g., materials).

Profit formula

Profit = Total Revenue - Total Costs.

Price

The amount consumers pay for a product, determined by supply and demand equilibrium.

Four market structures

Perfect Competition (e.g., wheat farming), Monopolistic Competition (e.g., fast food), Oligopoly (e.g., airlines), Monopoly (e.g., electric utilities).

Market failure conditions

Lack of competition (monopolies), Public goods (e.g., national defense), Externalities (pollution), Imperfect information (misleading advertisements), Income inequality.

Government intervention reasons

To maintain efficiency, fairness, and economic stability.

Federal government regulations

Antitrust laws to prevent monopolies, Environmental regulations, Consumer protection laws, Price controls (minimum wage, rent control), Fiscal and monetary policies to manage inflation and unemployment.